Noisy Retrievers and the Fourfold Reaction to Rare Events
36 Pages Posted: 13 Sep 2013
Date Written: April 2013
Previous research documents two pairs of inconsistent reactions to rare events: 1) Studies of probability judgment reveal conservatism which implies overestimation of rare events, and overconfidence which implies underestimation of rare events; 2) Studies of choice behavior reveal overweighting of rare events in one-shot tasks, and the opposite bias in decisions from experience. The current analysis and experimental results demonstrate that the coexistence and relative importance of the four biases can be captured with simple models that share the assumption that judgments and decisions are made based on the information conveyed by small and noisy samples of past experiences.
Keywords: Black swan, prospect theory, experience-description gap, case-based decision theory, overgeneralization
JEL Classification: C79, C91, D81
Suggested Citation: Suggested Citation